MPC Meeting (22 – 24 January 2013)

In reaching its interest rate decision, the Monetary Policy Committee (“MPC”) considers various factors that influence inflation, for example:

• changes in administered prices;
• changes in wages, productivity and unit labour cost;
• components of domestic and external demand;
• exchange rate developments;
• money supply and credit extension;
• oil prices; and the expected output gap (the gap between actual and potential output).

The MPC has no level or target for any of these variables and the rate of inflation is the benchmark for monetary policy decisions, which are made by consensus.

Below is a brief summary of a few of the findings regarding economic developments, as per statement of the MPC, substantiating their reasoning to keep the repo rate unchanged.

There has been some improvement in global financial market sentiment, although forecasted economic growth in the major economies remains constrained. Structural problems in many countries, with specific reference in the Eurozone, remain unresolved, bringing about downside risks to the economic outlook. The Eurozone is likely to remain in recession for much of the year and the unemployment rate has now reached 11.8%. The main driver in the region, namely Germany, has also deteriorated. Growth prospects in the UK remain relatively week while the outlook for Japan is uncertain. The outlook for emerging markets, particularly those in Asia, is more positive. Growth acceleration is anticipated for both China and India in 2013. Growth in Africa is expected to be around and above the 5% level and Latin American growth is also expected to improve on 2012, although at a more restrained rate. On the positive side there are signs of recovery in the US housing market and improved corporate profitability.

Gross domestic growth is subdued by down scaling of mines and the negative impact of rating agency downgrades. Estimated growth for 2012 is 2.5% with a slight increase in 2013 forecast at 2.6% and 3.8% for 2014.

The year-on-year inflation rate increased from 5.6% to 5.7% in December 2012, as measured by the consumer price index (“CPI”). Inflation is expected to average 5.8% in 2013 and 5.2% in 2014. The reweighting and rebasing of the CPI still needs to be finalised but the impact is likely to be marginal.

The MPC continues to assess the balance of risks to the inflation outlook to be on the upside, although the exchange rate and wage settlements remain the key upside risk factors. Unrealistic wage settlements could cause a possible wage-price spiral and further job loses whilst economic growth remains constrained, leading to a hike in inflation. The risk of food price increases may have diminished somewhat, particularly over the medium term, although food prices are also affected by the weather and the rand exchange rate.

A 16 % Eskom tariff increase is assumed for later this year, although this still needs to be finalised.

International oil prices have remained relatively stable for the past few months.

The rand has been fairly volatile, appreciating from R8.94 to R8.45 against the US dollar at the end of 2012, and then depreciating to levels around R9 more recently. Since the beginning of 2013, the rand has depreciated by 6.6% against the US dollar, although most analysts do not anticipate significant further depreciation in the following months.

The MPC expects household expenditure not to pose inflationary threats. Banks’ total loans and advances to the private sector have increased, however total debt to disposable income appears to have stabilised at around 76%.